Restatement (Second) Of Conflicts selected sections
Section 186–188 outline contractual choice of law. 186 simply says that the law chosen by the parties will govern. 187 outlines how this works. Basically, the courts will be very differential to choice of law provisions, following them unless the chosen state has no substantial relationship with the parties, or another state’s (that has more than half a material interest) fundamental public policy is violated.
Nedlloyd Lines B.V. v. Superior Court of San Mateo County Seawinds Ltd.
834 P.2d 1148 (Cal. 1992).
Question
Whether the California court will enforce a choice of law provision stating that Hong Kong’s law should govern.
Rule
The Restatement test follows a procedure of questions:
- If either (1) does the chosen state have a substantial relationship to the parties or (2) is there a reasonable basis for the choice of law, then move to step to. If neither condition is satisfied, there is no need to enforce the provision.
- Then determine whether enforcement is against a fundamental public policy (move to step three). If there is no violation of a fundamental public policy, enforce the provision.
- Does the state with a violation of fundamental public policy have a larger material interest in the issue than the chosen state? If so, the provision is not enforced.
Holding
The contractual provision is enforceable, reversed.
Facts
Nedlloyd and other parties wanted to invest in Seawinds stock and signed a shareholders agreement. As part of the agreement, the parties were to strive for the success of Seawinds. Although several of the parties were spread throughout the world, Seawinds and at least one other related party were domiciled in Hong Kong. the shareholders agreement contained a contractual provision stating the agreement was governed by the laws of Hong Kong.
Nedlloyd became disengaged from Seawinds and caused several issues for the company that resulted in loss of cliental, loss of potential cliental, and loss of capital (Nedlloyd backed out of a commitment to provide additional capital). Thus, Seawinds went into bankruptcy and sued Nedlloyd in California for breach of contract and fiduciary duties under the shareholders agreement.
Analysis
First, the parties have a substantial relationship with Hong Kong (the chosen law), at least two being incorporated there. Second, Seawinds did not point to any provision where California’s fundamental public policy is violated. Third, Seawinds argued that breach of duty is a tort separate from the contract; this argument is flawed because the scope of the clause extends to all claims arising out of the contract.
Although the dissent agrees with the rule, they believe the majority incorrectly applied the scope when it covered all claims, contractual or otherwise, with a contract choice of law clause that extended only to the contractual text.
Banek, Inc. v. Yogurt Ventures U.S.A., Inc.
6 F.3c 347 (6th Cir. 1993).
Questions
First, is this a valid choice of law clause or is it a waiver of rights which is prohibited under the [Michigan Franchise Investment Law]? Second, if the clause is valid, is this choice of law provision enforceable under Michigan choice of law rules? Third, if this provision is valid and enforceable, does Georgia law govern all claims between the parties or only contract claims?
Rule
See Restatement (Second) of Conflicts § 187 (described above).
Holding
The contractual clause is valid and enforceable, affirmed.
Facts
The plaintiff (Michigan domicile) opened up a franchise of Freshens Yogurt in Michigan. Freshens Yogurt is owned by Yogurt Ventures U.S.A., Inc., a Georgia corporation. Sales were not coming in as expected and the franchise closed down two years later. Before closing, a lawsuit was filed claiming breach of contract and other violations of Michigan and federal law.
As part of the franchise agreement, the parties contractually agreed to apply Georgia law.
For this reason, the trial court dismissed any plaintiff’s claim associated with Michigan law.
Analysis
First, the choice of law clause is not a waiver of the Michigan laws. The Michigan laws expressly prohibited choice of forum clauses—stating that would be a waiver—but declined to adopt choice of law clauses.
Second, the clause is enforceable under Michigan’s choice of law rules. Michigan allows forum selection clauses in accordance with the Second Restatement of Conflicts. Here, there is no violation of a Michigan public policy because the laws are not substantially different.
Third, the scope of the clause extends to all claims, contractual or otherwise, made by the plaintiff. This is plain in the language of the clause.
Additional Notes
Consider Kipin Industries, Inc. v. Van Deilen International, Inc., 182 F.3d 490 (6th Cir. 1999). If the choice of law clause would invalidate the contract, then the court will assume the choice was a mistake, then the court will look at § 188 to determine which applicable law would govern. If the better jurisdiction based on § 188 is the same as the law selection clause, then the contract will remain invalidated.
Cook Sign Co. v. Combs
2008 WL 3898257 (Ct. App. Minn.)
Question and Conflict
Whether the non-compete agreement between the parties ought to be enforced and which state’s laws will govern.
North Dakota would not enforce non-compete agreements, but Minnesota will (although disfavored).
Rule
If Minnesota has a substantial interest in the litigation (considering the following factors), then the choice of law clause will stand:
- Predictability of result
- Maintenance of interstate and international order (most important here)
- Simplification of the judicial task
- Advancement of the Forum’s governmental interest
- Application of the better rule of law
This is the “better law” approach.
Holding
Most of the factors lead towards application of Minnesota law, so the choice of law provision is enforceable; affirmed.
Facts
After acquiring most of the assets of another sign company, Cook sign Co. (a North Dakota company) offered Combs (a previous employee of the other company and a resident of Minnesota) a job. During discussions, Combs knew there would be a noncompete agreement. Combs signed two different documents, (1) an employment agreement covered by the laws of North Dakota, (2) a non-compete agreement covered by the laws of Minnesota.
Six months after joining Cook Sign Co, Combs left the job to work for a competitor. Under the non-compete agreement, litigation was filed in Minnesota to enforce the agreement.
Analysis
Combs argues the two separate agreements show forum shopping. The court runs through the factors above. First, a choice of law clause enhances the predictability of result because the parties agreed to the law to be applied. Second, enforcing the choice of law provision would not show disrespect to North Dakota law because the parties negotiated together and agreed that Minnesota choice of law would apply. Third, either state could apply the law equally well. Fourth, Minnesota is the forum so Minnesota’s interest would be served by applying its laws. Finally, the fifth factor is not important here because the other factors are determinative.
Additional Notes
The problem with this kind of case it that it incentivizes each party to seek a judgment first. For instance, if Comb wanted the noncompete clause to be unenforceable, he would have sought for a judgment in North Dakota before Cook could have received a judgment enforcing the agreement.
Hall v. Sprint Spectrum L.P.
876 N.E.2d 1036 (Ill. App. 2007).
Question
Whether the choice of law clause in one jurisdiction is enforceable to a national class.
Rule
Second Restatement § 187(2)
Holding
Affirmed
Facts
Sprint (in Kansas) has a contract that requires customers to pay an early termination fee. The plaintiff here (in Illinois) wanted to terminate her contract early, but Sprint declined to do so unless she paid the termination fee. When she failed to terminate her contract, she filed a class action lawsuit in Illinois.
Sprint’s contract has a choice of law clause saying the law applied should be Kansas. Here, Sprint is trying to invalidate the clause. Class actions require commonality between the plaintiffs (common facts and common law). If Kansas law is applied nationally, then the class action could continue. Sprint wants Illinois law to apply so the class action cannot continue.
Analysis
Using the Second Restatement of Conflicts § 187, Kansas law should apply. First, § 187(2)(a), Sprint has a substantial relationship with the chosen law (being the headquarters) and thus there is also a reasonable basis to apply Kansas law. Second, applying § 187(2)(b), application of Kansas law would not violate a fundamental policy of Illinois law. Because Sprint sought Kansas law in an adhesive contract, and all the claims were tied to contract law (even statutory fraud), enforcement would not violate due process.
Additional Notes
One final note is that choice of law clauses will not bind state attorney generals.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
